Friday 3rd July 2009 Blog

Tax Savings of Incorporation

Your client can still save tax by operating their business through a company rather than as a sole trader or partnership, but the level of tax savings will depend on the range of salary, dividends and benefits that they want to take out of the company.

If your client takes a salary equal to the personal allowance of £6,475, and extract the rest of the profits as dividends, they could make the following tax savings in the current tax year. This salary level involves paying some NICs as the NIC threshold is £5,715, but a lower salary would waste part of the dividend tax credit. Salary is also tax allowable for the company whereas dividends are not.

For 2009/10 the following shows for different profit levels the tax payable as a sole trader, by incorporating as a company and the total saving...

Profits £15,000: Sole trader: £2,573 - Company £1,951 - Total saving: £622
Profits £30,000: Sole trader: £6,773 - Company £5,101 - Total saving: £1,672
Profits £50,000: Sole trader: £13,169 - Company £9,463 - Total saving: £3,706
Profits £100,000: Sole trader: £33,669 - Company £29,838 - Total saving: £3,831
Profits £150,000: Sole trader: £54,169 - Company £50,213 - Total saving: £3,956

There are other tax factors to consider. For example...

- If the company owns a car that is used privately by the business owner, this can seriously reduce the tax savings. However, the answer is not straight forward as it depends on the cost, age, and CO2 emissions of the car (see below).
- The amount of profits left within the company for future use. If dividends are only taken to take your income up to the level of basic rate tax, substantial further savings of many thousands are possible!
- The availability of tax-free benefits such as childcare vouchers.

Tax rates are due to increase from 2010/11. Individuals will pay a top rate of 50% on income over £150,000 and the personal allowance will be withdrawn for those with income over £100,000. The tax rate paid by a small company will also rise to 22%. These changes will reduce the tax savings to be made by operating through a company. The calculations summarised as follows for 2010/11 assume a salary equal to a personal allowance of £6,635, which is reduced to nil when profits exceed £113,000.

Profits £15,000: Sole trader: £2,530 - Company £2,004 - Total saving: £526
Profits £30,000: Sole trader: £6,730 - Company £5,304 - Total saving: £1,426
Profits £50,000: Sole trader: £12,998 - Company £9,704 - Total saving: £3,284
Profits £100,000: Sole trader: £33,448 - Company £30,273 - Total saving: £3,215
Profits £150,000: Sole trader: £56,642 - Company £53,633 - Total saving: £3,009

Posted by: Bookcert Mentoring Team

Friday 3rd July 2009

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